Demergers

What are Demergers?

The demerger is the converse of a merger or acquisition. Demerger can be defined as the split or division of a company into a greater number of companies. Demergers are basically taken up for two reasons:

(i) To exercise corporate restructuring;

(ii) To give effect to a kind of family partitions in the case of family owned/ controlled companies

Demergers may be in the form of Partial Demergers, where a part, division, or department of the company is transferred to one or more companies & Complete Demergers, which is found when the whole business of the company is transferred to one or more new companies.

Why Demergers?

As merger and acquisition have been a remedy for a number of companies to create value and to grow, the others feel separating or segmenting ownership might become more advantageous. To them, corporate break-ups seem to be more effective and attractive to enjoy an improved operating performance and better information flow to the investors because of separating financial disclosure. In Indian perspective, various reasons act as the driving force for the demerger to be resorted to by the companies, like:

i. Pulling down the business risk in the fiercely competitive environment that has

been emerged as a consequence of liberalization and globalization;

ii. Achieving tax advantages provided under the Income Tax Act; and

iii. Opening a new window for resolving crisis relating to inheritance.

Notable Demergers in India:

The spin-off of Reliance Communication Ventures Ltd, Reliance Natural Resources Venture Ltd and Reliance Capital Venture Ltd from Reliance Industries Ltd as a result of family dispute still remains as an iconic example of demergers in Indian context. Demergers on the strategic ground can attract the example of Larsen and Toubro where Ultratech, the cement division was demerged to concentrate more on their core business infrastructure and engineering.

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Author- Preeti Iyer
Kautilya
IBS Mumbai